Thursday, January 30, 2014

The communist party's December 2013 economic work conference set "food security" as the top priority. Officials are gradually dribbling out details on a more market-oriented and flexible approach to food security.

An essay by a researcher from the State Council's Development Research Center explains China's new approach to food security. The researcher, Ye Xingqing, explains that a new strategic approach to food security strategy has evolved in response to environmental pressures and resource constraints. Mr. Ye says this adjustment of strategy in response to changing circumstances is consistent with the Deng Xiaoping principle of "seeking truth from facts."

Mr. Ye emphasizes that the food security strategy is formulated with a long-term view of maintaining balanced supply and demand of staple foods in China's transition to a new stage of development with a higher degree of urbanization and higher living standards. The new strategy emphasizes the importance of relying mainly on domestic supply, but allowing for appropriate imports.

Jettisoning soybeans from the defintion of "food" makes it easier to be secure since about 80 percent of China's soybeans are imported. Since 1996 China has adhered to a quantitative target of 95-percent self-sufficiency in "grains" which included cereals, soybeans, other beans, and tubers. By 2012, self-sufficiency based on this definition was down to 89 percent, which Mr. Ye said undermined the government's credibility. The new food security strategy narrows the scope to focus on cereal grains, especially on rice and wheat. The new slogan is, "cereals basically self-sufficient, food grains absolutely secure."

Mr. Ye emphasizes that the new strategy will no longer set incontrovertible quantitative targets for self-sufficiency. The degree of self-sufficiency will be determined by the relative prices and costs of agricultural commodities in China versus the international market, "not by government slogans." Mr. Ye connects this new approach to the two principles from the November 2013 "third plenum": market-directed resource allocation and a greater degree of openness in the economy.

Mr. Ye depicts Chinese agriculture as essentially an open economy. After joining the WTO, he says, China adopted tariff rate quota management and "amber box" policies but "they are very limited." He implies that China has few policy tools to insulate itself from imports.

Authorities need to push and influence the market, insists Mr. Ye. The food security strategy calls for relying mainly on domestic production, which means production capacity must be improved. He focuses on policies that can raise productivity and reduce unit costs: restore productivity to the soil, encourage mechanization and science and technology, promote larger-scale farming operations.

Shared responsibility between central and local authorities is another important part of the food security strategy. The "governors' rice bag responsibility system" set up in the 1990s is being re-emphasized. The Number 1 document said authorities in grain-deficit areas are expected to maintain reserves, form fixed buying relationships with grain-producing areas, and set minimum amounts of cropland (errr, well maybe not all resources should be allocated by the market). Various kinds of transfer payments are being set up to help authorities in grain-producing areas to finance grain-related infrastructure improvements.

The new food security strategy acknowledges that China's current production is unsustainable. He says China must "retire the toxic capacity, add healthy capacity." Environmentally-fragile hills, grassland, and wetlands should be retired and returned to conservation uses. This year China will begin pilot programs to rehabilitate 50 million mu of severely polluted cropland.

Mr. Ye acknowledged that the "appropriate imports" part of the food security strategy is controversial.

The nuanced approach to imports was on display in another opinion piece posted on the Peoples Daily site December 30, 2013, "Simple Free Trade Thinking Can Harm the People, Harm the Country." The writer made many of the same points about the difficulty of meeting demand with domestic supply but insisted that grain is a "priceless" commodity with strategic material properties. "Facing a complex international political environment, simple free trade thinking can harm the country and the people."

Mr. Ye insists China must accept agricultural imports as an inevitable trend. In 2010, researchers estimated that imports of oilseeds and edible oils would have required 760 million mu--about a third of China's cropland--to produce domestically. He emphasizes that other countries need stable expectations about China's intention to buy commodities. He cited a food security forum held in November where representatives from the United States and Brazil wondered, "Will China want our grain?"

Monday, January 27, 2014

In Jiangxi Province, Chinese officials are giving a cash bonus to encourage large-scale farmers who exceed average rice yields.

A propaganda article describes a farmer with 1.5 million yuan in cash stacked in neat piles on a table in his courtyard as he counts his year-end bonus. In Poyang County, large-scale farmers who cultivate 6000 to 10,000 mu (1000 to 1650 acres) of rice get a bonus "award" if their yields exceed the average. The payment is 0.5 yuan per jin (about US$0.16/kg) for every jin over the 1,000 jin-per-mu (7500 kg/ha) average yield (from two crops of rice). The per-jin subsidy rises with the yield. If a farmer achieves a yield of 1051 to 1100 jin, the subsidy goes up to 1 yuan/jin. The subsidy is bumped up to 1.5 yuan/jin if the yield is 1100 jin or more.

The award is paid out at the end of the year. Farmers are getting awards of 50,000 to 100,000 yuan ($8250-$16,500). The article doesn't explain how authorities verify the yield obtained by the farmers.

The award program is being carried out in Poyang county where officials spend 2.5 million yuan on the payments annually. It appears to be an experimental program designed to attract business operators from other sectors to invest in agriculture and consolidate land into large contiguous operations.

The article describes a "large farmer" named Ling Jihe who made 10 million yuan in the construction business and started up an agricultural company in 2009. He says he went door to door carrying wads of cash to rent land from villagers in order to form a large farming operation. He invested tens of millions of yuan in renting land, making improvements on it and buying machinery. It seems that the business operators subcontract the land to other farmers who actually do the farming.

Farmers say the net return per mu from growing rice is relatively low--300 to 400 yuan per mu (about $300-$400 per acre)--but "economies of scale" give them good earnings of 3-to-4 million yuan from 10,000 mu of land. According to the article, the award payment adds to the "economies of scale."

Saturday, January 25, 2014

China's leadership has adopted a cautious approach toward genetically modified foods. They want to keep one food on the accelerator by pushing more research, while keeping the other foot on the brake by slowing down commercial approvals. Any research results remain bottled up in laboratories as wariness of GMOS among consumers builds. This approach raises the question, "Who will persevere in research on things that may never be used?"

China's contentious GMO debate popped up at a January 22 press conference where the top agricultural policy advisor, Chen Xiwen, expounded on various topics in the central communist party leadership's "Number 1 Document" on rural policy released earlier this week. The document contained no direct mention of genetic modification, but the section encouraging innovation in agricultural science and technology included a call to "strengthen molecular breeding" as a foundation for research and biotechnology.

Chen expressed the view that genetically modified agricultural products must be subject to strict assessments to ensure they have no harmful side effects on consumers' health. When they are approved, Chen said, products containing GMOs must be labeled so consumers can decide for themselves whether to buy them.

Chen Xiwen also said that China, as a big agricultural country, can't be left behind in molecular breeding research--China needs to remain on the forefront. Thus, the "Number 1 Document" and several previous documents have urged pursuit of research on genetic modification.

A reporter noted that the 2010 "Number 1 document" promoted research on GMO crops, but recent editions have not mentioned it explicitly. He asked whether this reflects an increasingly cautious approach. Chen agreed, saying that reactions from various segments of society had prompted stricter commercial approvals. But he insisted there could be no slow-down in research.

The flashpoint in China's current debate is whether GM rice will be approved for commercial sale. A reporter asked Chen whether there was a possibility two Chinese GM rice varieties might be commercialized before their safety certificates expire in the next year. Chen replied that the Ministry of Agriculture will decide on this, but he felt approval is "unlikely" because China doesn't want to be the first country to commercialize genetically modified rice.

Chen said nonagricultural GM research should go ahead but China should be cautious with food crops. He noted that China's domestic crops are mostly GMO-free. Cotton--a non-food crop--accounts for most of its GMO production, and he said papaya is the only GMO food grown in China.

Chen downplayed the contribution of GMOs to productivity, saying that most GM crops are pest-resistant, reducing the need for chemical pesticides. Similarly, another agricultural policy advisor, Cheng Guoqiang, said genetically modified rice and wheat were not urgently needed now. He suggested that farmers don't benefit from GMOs because production is already so big that prices are falling.

Cheng Guoqiang recommends delaying commercialization of GM varieties as a measure to prevent multinational companies from dominating China's seed market. Cheng says China's domestic seed industry can't compete with Monsanto and other multinationals that occupy the commanding heights of the GMO seed market. China's seed industry, he says, is far behind in GM technology, lacks effective channels to disseminate new varieties to farmers, has little capital, no brands, and no strategic plan. He suggests that allowing GM seeds will result in the market being inundated with the seeds of multinationals while Chinese companies wither on the vine.

The seed industry was a big focus of the 2012 "Number 1 Document," and its development was the subject of a paragraph in the 2014 document. When asked in the news conference whether foreign dominance of the seed industry is a concern, Chen Xiwen said, yes, this is an issue. He claimed that three-fourths of vegetable seeds and some corn seeds are foreign, but foreign companies don't have a significant role for other types of seeds.

So China finds itself in a deepening quandary over genetically modified crops. Its consumers are hyper-health-conscious and receptive to all kinds of rumors and conspiracy theories. Chinese consumers often say GMOs shouldn't be sold unless it can be proven they do no harm. This sets up an impossible standard since there are an unlimited number of possible health risks, and health effects of foods are notoriously difficult to isolate and take years to be discovered. Virtually all foods cause allergic reactions or other unpleasant effects for some proportion of the population.

Meanwhile, it is unrealistic to think domestic research on GM crops will proceed when final products have little chance of commercialization. (It certainly won't progress fast enough to catch up with multinationals.) All the best scientists and plant breeders have already left China and can be found in the labs of American companies and universities. China's loss of talent will continue. Money will be thrown at Chinese labs that produce nothing of consequence.

Chinese farmers are, in fact, eager to gain access to genetically modified seeds. Drenching fields with pesticides is not a sustainable strategy for farmers to protect their crops from heavy pest pressure in monocropped fields. In studies of GM pest-resistant rice about ten years ago, Chinese researchers found the main benefit was that farmers didn't get sick from spraying pesticides. New seeds are being developed overseas with traits like drought tolerance that China desperately needs. Moreover, Chinese farmers working off-farm and cultivating larger tracts of land no longer have time to spray and weed fields.

The document calls for market-guided resource allocation but it reels off ten pages of recommendations for government intervention in almost every aspect of the rural economy.

It calls for establishing stable agricultural-trading relations with other countries but also calls for "plans" and "guidance" for imports, protecting "industry security," and keeping the country's rice bowl firmly in its own hands.

It calls for adventurous reform, "exploration," and "liberated thinking," but it also cautions readers that reform must be incremental and based on Chinese distinctive features. It revives numerous relics from past decades like the supply and marketing cooperatives that were formed to serve communes, the "governor's grain bag responsibility system" set up in the early 1990s, and the "price formation" concept of cost-plus pricing held over from the planned economy era.

The document says rural households should remain the primary farm operators, but offers numerous strategies for facilitating transfer of their land and creating new types of farm operations.

The first recommendation in a section calling for "establishing a grassroots democratic system" is to "consolidate and strengthen the [communist] party as the ruling foundation of the countryside" and "spread the party's mass-line education movements."

Despite "market-based resource allocation" rhetoric, authorities are expanding their agricultural subsidy menu exponentially. The Number 1 document promises to continue existing subsidies, including the direct payment to grain producers, seed and animal breed subsidies, input subsidies, and machinery purchase subsidies. It calls for pilot programs for "price insurance", marketing loans, and promises to begin pilot "target price" subsidy programs for cotton in Xinjiang Autonomous Region and for soybeans in northeastern provinces this year. The document includes a cryptic endorsement of "decoupled" subsidies but elsewhere urges officials to link subsidies to production. In addition, there are a whole series of subsidy payments for county governments in agricultural areas to encourage them to supply grain and pork to the rest of the country and compensate them for conservation and forest programs.

It is widely recognized in China that price support programs are distorting markets, causing expensive stockpiling programs, making processors and livestock producers uncompetitive, and boosting reliance on imports. But the document says the price-support stockpiling programs will continue for rice, wheat, corn, rapeseed, and sugar. Cotton and soybean stockpiling programs were not mentioned, which presumably means they will be eliminated. The inclination to improve on market prices is reflected in another recommendation to stabilize prices by setting permissible bands within which prices will be allowed to fluctuate. A hog-price stabilization program was introduced in 2009 to accomplish a similar objective, but the document says the program needs to be "improved."

The new leadership in China acknowledges that institutional rigidities hold back agriculture and they offer dozens of cosmetic reforms of rural land and financing mechanisms. The number 1 document devotes a lot of attention to ideas for facilitating the transfer of farmland without selling it, improving rural financial services, mortgaging the rights to use farmland, and enticing or cajoling companies and banks to invest in agriculture. However, it maintains the fundamental rigidities that discourage long-term investments. While authorities now say peasant land-holders' rights must be respected, the peasants still don't really own their land. Someone who leases land faces the risk that the lessor will demand it back or demand higher rent next year. The document calls for creating permanent farmland which is prohibited from conversion to other uses.

The Chinese leadership acknowledges that the country cannot produce all the agricultural commodities it needs and endorses "appropriate imports." The document calls for exploring use of the international market and investment overseas to supplement domestic production. It urges development of stable trading relationships. However, it also calls for using imports and exports to control or adjust the market, for formulating "plans" for imports and preventing imports from threatening "industry security." This rhetoric implies that imports may be turned on and off like a spigot depending on whether the Chinese market is in short supply or if domestic sectors are threatened by imports. Thus, food safety standards or bans on GMOs, ractopamine, or supposed disease concerns may be ignored as long as the domestic market is in short supply, but suddenly enforced stringently when imports are no longer wanted.

This erratic trading behavior undermines China's long-term food security. Agriculture is a slow industry where investments have long-term payoffs. If farmers overseas have firm expectations of stable sales to China they will invest in production capacity and grow crops or raise animals tailored to the Chinese market. But if access to the Chinese market is opened and closed in an unpredictable fashion, farmers will not make those investments. When China stopped buying grain in the 1990s American farmers started investing in ethanol plants. The frustration with China's sudden rejection of U.S. corn this year may similarly sour American farmers on producing for the Chinese market. When China needs that corn in the future it may not be there.

Tuesday, January 21, 2014

China's "Number 1 document" promises more subsidies: target prices, revenue insurance, marketing loans, etc. Few people realize the difficulty of implementing and evaluating subsidy programs. Whenever subsidies are made available, people become eager to report subsidized things to the government. Statistics become meaningless and any subsidy program has enormous overhead costs to collect and verify information to catch cheaters and to determine whether programs are working.

In 1995, China reported that it had 95 million hectares of cropland, the basis for the oft-cited statistics that China feeds 22 percent of the world's population on 7 percent of its farmland. In December 2013, the Ministry of Land Resources announced that its new and improved survey in 2008 (but not announced until five years later) found that China had 135 million hectares of cropland, 42-percent more than the 1995 total.

Wang Shiyuan, an official of the National Bureau of Statistics, explained that the statisticians knew all along that China had more cropland than they reported. The problem was that farmers and villages hid their land from authorities--including statisticians, apparently--when they had to pay taxes based on their land-holdings. During 2004-06 these taxes were phased out. Instead, authorities began giving subsidies based on land holdings or area planted in grain. Suddenly, land started appearing out of nowhere.

Some people might have thought that finding more land means that China's grain output might be larger than had been reported. But Statistician Wang patiently explained that this was not the case. The statisticians at NBS, you see, knew that the country had more land than they published in their books. Mr. Wang said statisticians made adjustments to their sown area statistics and that "most" of the newly-found cropland is already incorporated into grain production statistics. The much ballyhooed ten-straight increases in grain output since 2004 is said to be a result of China's grain subsidies. But the increase could be a statistical illusion--land that used to be hidden is now included in statistics. Voila! more grain production.

Many of China's statistics are based on reports filed by farms and local officials and passed up the chain. The shortfalls of this system are revealed in a training meeting on information reporting for officials in charge of model livestock farms held in November 2013. Model farms are one of the Ministry of Agriculture's main strategies for disseminating new techniques--they get subsidies to "demonstrate" how modern "standardized" farms should be run. At the training, a Ministry official told the gathering that they had found much of the data transmitted to them by the model farms was inaccurate and/or late. The official stressed the importance of getting correct, timely, and complete information to assess the programs. Application guidelines for a "tourism model livestock farm" program in Qingdao warn applicants that they will be banned from the program for two years if they are found to have reported false data in the application.

In 2011, a Southern Rural News reporter was told that officials in western provinces who get subsidies for pig vaccines overstate the number of pigs they have to get more subsidies (see "Pig Vaccines: Free and Worthless"). In eastern provinces where local governments have to foot the bill for vaccines, they under-report pigs. A Guangdong official said, "We take the number of pigs and reduce it by a third."

In China, statistics have a strong legacy as tools the governing authorities can use to validate their policies or otherwise manipulate perceptions of reality. The tight link between policies and statistics plus the longstanding cat-and-mouse game between local and central officials adds up to chronic statistical distortion.

Friday, January 17, 2014

The Agricultural Development Bank of China (ADBC) is injecting loans into China's countryside to make sure farmers can sell their commodities despite sinking prices. This looks like a financial crisis waiting to happen.

In the first week of January ADBC issued a notice to its staff urging them to do a good job on issuing credit for grain and cotton purchases as the new year starts. Staff were ordered to increase their "political awareness" and sense of responsibility to ensure that farmers get good profits, keep grain and cotton markets stable, make that farmers can sell their grain and cotton and that farmers don't get paid with IOUs.

The ADBC was spun off from the Agricultural Bank of China (ABC) in 1994 to fund government commodity procurement (allowing ABC to focus on commercial lending). ADBC slurps up funds from deposits from commercial banks placed with ADBC and by selling bonds, then lends out the money to state-owned grain and cotton procurement operations. With the government struggling to prop up prices this year, the bank's lending is booming. The ADBC notice issued this month emphasized the importance of issuing credit to support the "temporary reserve" purchase of corn and soybeans in northeastern provinces.

In Xinjiang Autonomous region the ADBC financed 75 percent of cotton purchases during 2013. The volume of cotton it financed was up 8 percent and loan volume was record-high at 65 billion yuan (over $10 billion). Xinjiang accounted for three-fourths of all the cotton purchases supported by ADBC.

ADBC's chief executive and party secretary explained the bank's important role in supporting the rural economy in light of the third plenum of the 18th party committee. The third plenum emphasized the decisive role of the market, but ADBC--a government policy bank--is expected to play the key role in mobilizing capital for modernizing agriculture and building new cities in the countryside. The rural banking system is barely functional as a financial intermediary since most farmers and small businesses have no assets to secure loans with. ADBC is expanding the scope of its business to include more lending to infrastructure and rural development projects. ADBC is also to give credit to Chinese agribusiness companies investing overseas to meet Chinese demand with "two markets, two resources."

ADBC has a curious notion of market economics. Its January notice to staff said it is important for their credit to support "policy-style purchases" (at support prices) to "guide" market prices. In other words, the market price is wrong and the government-set support price is right.

ADBC claims that its nonperforming loans are declining and its NPL rate is now just 0.71%. However, lending billions of dollars to buy cotton at prices 50% above the world price is not a healthy lending practice. The bank financed a large portion of the 35-million tons of corn purchases at support prices last year that are unsellable this year because prices have fallen. Another 40 million tons of corn is expected to be stockpiled this year. Grain stocks are reported to be at a record-high level--much of it financed by ADBC--and prices are falling.

Conditions are quite similar to those in the late 1990s. At that time, the grain and cotton marketing system lost billions of dollars and the ADBC's nonperforming loan rate zoomed to 25-to-40 percent. This time, ADBC is just a small corner of China's cash-rich economy and it can keep propping up commodity markets as long as the cash keeps flowing. Remarkably, China's reserve-cotton-buying spree has continued for three years now, financed mostly by ADBC. But there is potential for lots of things to implode at the same time. If the flow of cash dries up ADBC will become part of the financial meltdown.

The Ministry of Finance allocated 122.2 billion yuan (US$ 20 billion) for grain subsidies--15.1 billion yuan for the direct payment to grain producers and 107.1 billion yuan for the "general input subsidy." These totals are unchanged from the last two years. The Ministry urged provincial and local officials to distribute the funds as soon as possible, striving to ensure farmers get the money before spring planting.

The Ministry also instructed local officials to explore mechanisms that couple (挂钩) subsidy payments to production by ensuring that farmers who plant more grain get more subsidies. The objective, said the Ministry, is to motivate farmers to plant grain.

The direct payment was first implemented in 13 major grain-producing provinces in 2004. The subsidy diverted money from indirect subsidies given to government grain bureaus and gave it to farmers. Funds allocated to provincial "grain risk funds"--used to fund procurement by government grain bureaus--were divided by the number of acres or tons of grain produced and paid out to farmers based on their land holding or sales of grain. The payment usually amounted to 10 yuan per mu (about $10 per acre at the current exchange rate).

In 2013, Guidong County held a meeting to discuss verifying

the land area farmers reported to get grain subsidies. Many officials complain

that the subsidy-distribution process takes an inordinate amount of their time.

The direct payment was "decoupled" in World Trade Organization-speak, which meant it doesn't distort markets and doesn't count against China's WTO-imposed limit on domestic support. In most places, the subsidy was paid to rural households based on the amount of land they contracted from their village collective in the 1990s. Such payments were "decoupled" since they didn't vary with the amount produced. In effect, it was a small entitlement sprinkled over the rural population since nearly every rural household had a land holding (on average about 1 acre). Many criticized the subsidy for functioning as a "land subsidy," not a "grain subsidy." Some households who stopped farming and rented out their land to others still got the subsidy. In some cases, people still got the subsidy even though they built a house or fish pond on the land. Renters got no subsidy. Of course, everyone thought the subsidy was too small.

The disconnect between subsidies and production is becoming more pronounced because land-holdings are increasingly cultivated by renters. Surveys by the Ministry of Agriculture have found that the share of farmland rented, leased or otherwise transferred to be farmed by someone else has risen from about 7-8 percent ten years ago to over 25 percent now.

In April 2013, officials were ordered to visit villages to investigate implementation

of subsidy policies. In Guangyuan County, they were ordered to inform farmers that

"the more you plant, the more subsidy you get" and sort out land disputes.

China will no longer be able to exempt the direct payment from its WTO subsidy calculation. However, this will have no practical significance since the subsidy is a small percentage of the value of production.

The "general input subsidy" was created in 2006 by taking funds used to subsidize fertilizer companies and paying them out to farmers to compensate them for rising costs of fertilizer, fuel and pesticides. The input subsidy is larger than the direct payment, about 60-to-80 yuan per mu. From the beginning, authorities encouraged local officials to link the input subsidy to area planted in grain. It was not reported to WTO as decoupled but it was reported as non-product-specific. That allowed China to divide the value of the subsidy by the value of all agricultural output, thus making it a tiny percentage that falls well within its limit.

It is difficult to discern whether the subsidies had any impact on grain production. They were paired with high and rising grain prices which probably were the main incentive for production. If prices were allowed to fall, the subsidy payment will have to be quite large and closely linked to production in order to maintain production incentives. Moreover, large subsidies would be an invitation to fraud and abuse. The main effect of subsidies has been for farmers and villages to report land they used to keep hidden when it was subject to taxes.

Officials have promised to replace cotton and soybean price supports with direct subsidies to farmers. These subsidies will be "coupled" and "product-specific." These subsidies will be even harder to implement than the grain subsidies since villages don't have reliable records of cotton and soybean plantings which can change from year to year.

Wednesday, January 15, 2014

Does it make sense for Internet companies to raise pigs? Can innovative "Internet thinking" contribute to solving China's agricultural and food safety problems? While many presume that IT tycoons can easily find solutions in a seemingly simple business like pig-farming, the reality is that raising pigs is more complex than creating a web site.

In 2009, the CEO of Netease, one of China's top Internet companies, announced a plan to launch an innovative pig farm which would allow customers to track the complete production process of the pork they buy. Nearly 5 years later, the project hasn't produced any pork.

Netease pigs are making slow progress.

A Southern Metropolitan News reporter visited the farm and interviewed the current director of Netease's agriculture project as well as former executives of the company. At the 2009 meeting of the Guangdong Peoples Congress where he was a delegate, Netease CEO Ding Lei announced his plan to apply science and technology to agriculture and address food safety problems by starting a pig farm. The initial plan was to set up a farm that would raise 6000 to 10,000 pigs annually with a target opening date in 2012. As of December 2013, the farm was still in an experimental stage and had only raised 400 pigs with 100 head nearly ready for slaughter.

The 1200-mu (about 200 acres) farm is under construction in a village in Anji County, a semi-mountainous area in northern Zhejiang Province. The company has ambitious objectives and met with many unexpected problems in the project. To start with, acquiring the land by consolidating plots held by hundreds of village families was a bigger headache than expected. There was also a legal dispute with an engineering company over payment for land surveys.

The extremely hot summer weather in Zhejiang is hard on pigs, and the farm had to develop a special cooling system. They spent a year choosing animal breeds, finally settling on hybrids of two domestic breeds instead of the imported breeds that are predominant in China now. Disposing of manure was another problem. The company hoped to eliminate bad smells by studying the behavior of pigs and training them to defecate in a designated area of the barn where the waste is carried through a pipe to a treatment facility.

The company describes their experience as a long-term process of collecting experience, debugging, and many detours in creating something from nothing. They learned not to expect the lightning speed of the Internet in the slow, deliberative process of farming. The company confesses that they overestimated their ability and underestimated the difficulties of pig-farming. Complex supply-chain management is not the company's strong suit. Web sites can be set up overnight and companies have nearly direct contact with customers, but the pig production and marketing process is more complex. A Netease spokesman was quoted, "We never had a project move so slowly."

The pig project appears to be a personal crusade of Mr. Ding, the Netease CEO. He set up an agriculture division of the company and recruited two of his high school classmates from Ningbo to run it. Ding reportedly participated in long meetings where he asked endless questions about the pig farm, although he didn't have direct responsibility for managing the project.

The two classmates quit the company last year. There is some indication of conflict over the operation's objective. Mao Shan, the farm project's former manager, indicated in an interview earlier in 2013 that the company's agriculture division was looking at other types of farming ventures like fruit orchards, flowers, bullfrogs, blueberries and strawberries that promised to make big profits. The company downplays the profit motive, describing the pig project as the company's "social responsibility." Mr. Ding never set a deadline for earning money on the pig project, patiently allowing it to move at is own pace.

None of the Netease executives have a background in agriculture. Mr. Ding and one of his classmates were trained as engineers; the other classmate is a publicity specialist. They made dozens of visits to pig farms, equipment manufacturers, and breeders all over the world in preparation for the farm project.

Of course, Netease's access to capital is a big advantage that most farms and agriculture-focused companies lack. The Anji County government web site says the Netease pork project's investment is 300 million yuan (nearly $50 million).

The Southern Metropolitan News reporter suggests that agriculture can benefit from "Internet thinking," despite being a "slow, deliberative" process that contrasts with the "lightning speed" of the Internet. First is the potential for e-commerce, social networks and new sales channels. Internet companies emphasize interaction with customers. Narrowing the virtual distance between production site and customer in theory can increase confidence in the final product. The use of big data can potentially improve marketing and supply chain management.

Some other meat and poultry companies are implementing traceability systems. Chickens have codes attached that consumers can use to see on their mobile phones the farm and source of chicks and drugs used. (Similar systems were introduced for vegetables on an experimental basis nearly 10 years ago, but don't seem to have gained popularity.)

Other pig farms are using "ecological" and transparency strategies to produce local breeds of pigs, but most charge extremely high prices for the pork. One industry analyst suggests that Internet companies can contribute by serving as a platform for sharing information rather than raising pigs themselves.

The Netease Company project appears to be an attempt to "reboot" farming in China by bringing in a completely new set of actors, capital and concepts. Companies that made money elsewhere are expected to bring their money and expertise to reshape an activity stuck in the past. This appears to be official policy--in December Minister of Agriculture Han Changfu and State Council rural policy guru Han Jun both made separate speeches calling for companies to invest in agriculture. Minister Han warned investors not to expect "overnight riches."

Will a "ctrl-alt-del" reboot flush out the bugs clogging China's agricultural system, or will it result in a "blue screen"? Experiments like Netease's are not jokes. They should be carefully watched to gain clues about the best way forward.

Monday, January 13, 2014

China's latest plan for agriculture is to substitute big data and artificial control for traditional farming methods.

On January 10, Vice Minister of Agriculture Yu Xinrong announced the launch of regional pilot "Internet of things agriculture projects." The "Internet of things" (物联网) is the network of gadgets and sensors that are connected through the Internet, collect and compile vast amounts of data and can be controlled remotely from computers or mobile phones. Applications are mainly for remote-controlled greenhouses, animal traceability systems, and monitoring of transportation and storage facilities.

System design for Internet of Things in agriculture and logistics.

The pilot projects are in Tianjin, Shanghai, and Anhui. Mr. Yu made the announcement during a trip to Shanghai where he visited the Bio-tag Ltd. Co. which makes electronic tags for animals, the Shanghai Infrastructure Agriculture Internet of Things Base, a vegetable company, the Shanghai Internet of Things Service Center, the animal traceability electronic service center, and the Plant Growth Perception Demo and had discussions with experts and company executives.

Vice Minister Yu said that the recent "agricultural work meeting" in Beijing recommended relying on science and technology-support and innovation-drive to follow the path of modern agriculture with Chinese characteristics. The "Internet of things" strategy will be "government-guided" and "market-driven." Policies supporting technology and innovation will support the Internet of things strategy, said Mr. Yu. The strategy emphasizes "system design" and a concept of "whole system, all factors, whole process."

Tianjin's agriculture commission's description of its projects gives some clues about what "Internet of things" agriculture is. The project is described as part of the municipality's transition from traditional agriculture to information-ization and intelligent development. Other buzz words include "science and technology planning," "small and medium enterprises," "high-tech companies," and "metropolitan-style agriculture."

Over the past two years, 14 Tianjin projects have received public investment of 3.34 million yuan ($547 million) and private investment of 27 million yuan ($4.4 million) in research, demonstration and use of "Internet of things" in agriculture. Four key projects illustrate the applications of "Internet of things".

First is a system for climate control in greenhouses. An intelligent engineering system designed for artificial control of greenhouse temperature and air collects data and sends out warnings when temperature falls dangerously low in the cold winter months. A second project is aimed at improving food safety by monitoring microorganisms in milk at each stage "from cow to table." The dairy monitoring is said to increase transparency and improve the reputation and competitiveness of dairy companies.

A third project addresses problems in the chicken industry by again collecting and storing data on the various stages of the supply chain. The chicken project also plans to set up a system for remotely offering advice to farmers on disease diagnosis and prevention. This is supposed to raise profits for companies and attract more farmers to raise chickens and earn more money.

The fourth project addresses problems with growing vegetables in plastic-covered hothouses. This will use the latest micro-power wireless technology to collect data from temperature and humidity sensors and early detection of pests. Vegetables will be tracked and monitored visually in transportation and storage using GPS, RFID, sensing, and GIS to facilitate scheduling.

Diagram of vegetable hothouse using "Internet of Things" wireless technology.

China has a long love affair with technology and engineering solutions for agriculture. They have been building space-age agricultural facilities since the 1980s and much of this technology was used in Beijing's food safety system during the 2008 Olympics. Treating the food system like a space program may achieve impressive results but such systems fall into disuse once officials have lost interest, equipment breaks down and no one knows how to use it properly. Agriculture is a complex activity and there is no substitute for a farmer who knows his land and his customer.

Tuesday, January 7, 2014

Chinese officials pretend that acquiring hardware--laboratories and fancy equipment--assures food safety, but it doesn't. The equipment is worthless without skilled technicians to operate it. The long-entrenched Chinese strategy is to hold splashy opening ceremonies to impress visitors followed by neglect after the visitors have gone home.

The building was locked up and passersby told the reporter that no one had been to the building for a long time. The reporter peeked in the windows and saw a few pieces of equipment that appeared to be unused.Demonstrating testing for visiting officials at a vegetable company's lab near Nanjing.
This testing lab is part of a "hazard-free" agricultural product certification system set up by the Ministry of Agriculture about ten years ago to ensure that vegetables and other products supplied domestically are free of toxic pesticide residues. Branches of an "Agricultural Quality and Safety Center" certify swathes of farmland called a "production base" as being free of pollution and using acceptable practices. Testing is supposed to ensure that vegetables are free of toxic residues. This base near Nanjing covers 1000 mu (about 400 acres) and probably includes multiple villages.

Local farmers told the reporter that the laboratory building is just for show and is never occupied. They claimed that they would like to test the vegetables and fruits they grow but the building remains locked up.

A community official told the reporter that the lab technician is currently assigned elsewhere because not many vegetables are being produced. He said a technician is there when vegetables are harvested, but local farmers said no technician ever appears.

The reporter then went to the district's agricultural service center where another official told him there aren't enough technicians to staff the lab at the production site. All the staff are at the central testing lab, he said.

The reporter went to the district service center to investigate the testing there. He took a farmer with him. When he arrived at 10 am, he found the door to this building was also locked and no one responded when he knocked. He went around to the back of the building and found an employee. This person explained that the center is closed because the staff are cleaning up in preparation for a visit by higher-level officials.

One technician claimed that testing continued normally even though the doors were locked. The center had records showing that all vegetables tested were within tolerances for residues each day. To prove they were doing testing, he showed the reporter boxes of cabbage and greens that had just been delivered for testing. The farmer accompanying the reporter laughed at this response, saying, "Everyone knows that cabbage is not harvested in Nanjing during this season--anyone trying to pass off this as local cabbage is ignorant about farming." They concluded that the vegetables they were testing must have been brought in from some other place.

The reporter pressed the technician on whether there is any way to verify that vegetables brought to the center are from the local area. He could not provide a clear answer.

Monday, January 6, 2014

China’s food industry barely existed as recently as the 1990s, and it is still a slapdash collection of thousands of small, low-tech, under-capitalized companies that produce little value added and mostly serve local markets. In China, everything has to happen overnight, but the process of sifting and consolidating companies to build a strong industry that interfaces effectively between farms and consumers takes time. Will Chinese officials and consumers have the patience to wait for a strong food industry to take shape?

An August 2013 survey of Heilongjiang Province’s food industry provides an interesting snapshot of the difficult process of creating a food industry in an urbanizing society. Heilongjiang is in China’s far northeast, bordering Russia. It is more lightly populated than most of China, has large expanses of forest and grassland and is China’s leading producer of grain and second-largest dairy producer. Because of its relatively clean environment, it is a leading producer of “green” and organic food. It is China’s leading producer of grain and soybeans, and its rice is known for high quality. Heilongjiang has a large network of state farms that were set up to populate areas along the border when Mao was worried about a Russian invasion.

The survey’s stated purpose is to support Heilongjiang’s transition from an agricultural province to a food province by administering questionnaires to 860 food manufacturers and making onsite visits in August 2013. The survey included “above-scale” (over 20 million yuan or $3.3 million in gross income) companies as well as small businesses that are usually excluded from industry statistics.

Rapid Expansion

The survey respondents reported red-hot growth. The value of output grew 26.7 percent for above-scale companies but only 10 percent for small ones in the first half of 2013. Asset value grew 15 percent for above-scale companies and 23 percent for small companies. Income and profits were also up 23 to 30 percent. This pace of growth is surprising considering that China’s economy was not especially vibrant in 2013.

The rapid expansion of companies partly reflects a consolidation process as the industry transitions from a highly dispersed structure of numerous extremely small businesses to fewer, larger companies. (The survey didn't track how many companies went out of business.) Of the 1500 food companies in the province, only 15 have over 1 billion yuan ($160 million) in assets. The survey says there are only 20 “large” companies and 97 medium ones. Most companies began as family businesses, make low-end products, are low-tech, labor-intensive, and use crude management practices. Companies produce “blindly” without knowledge of the market, turn out copycat products, compete with each other for resources, and engage in “disorderly” competition.

Lack of Financial Intermediation

It’s unclear how such rapid expansion is being financed. The report characterizes food companies as chronically short of capital. They are described as having large debts (the average debt-asset ratio is 50 percent), yet most individually-operated companies are barred from borrowing money because they have no assets they can mortgage. Many companies have few fixed assets, as they rely on rented factories and equipment. The report says small village rice mills can’t borrow because collective land can’t be mortgaged. Companies have cash flow problems since they must purchase raw materials in a concentrated period of time and process them throughout the year.

The report cites figures on investment in Heilongjiang’s “green food” industry which indicate funds for expansion are generated from internal sources. “Green food” is a uniquely Chinese (i.e. vague) food certification that might be called semi-organic, an initiative that originated with the province’s state farm system in the 1990s to boost confidence that food products are free of pollutants and chemical residues. Investment totaled over 16 billion yuan ($2 billion) and rose more than 20 percent in 2012. The provincial government has long endorsed “green food,” but just 140 million yuan of investment came from the government. Bank loans accounted for just 630 million yuan. Foreign investment in Heilongjiang’s “green food” industry totaled 3.3 billion yuan. Most funds for green food investment were internally generated, totaling 11.8 billion yuan, but there is no clue as to where this money came from. All but the largest companies are barred from formal equity markets, and venture capital is in its infancy. This capital may have been savings of company bosses, earnings from real estate or other ventures, or raised by selling shares to friends and relatives.

The report's authors point out that financial support is a systemic problem and companies need to start by building credibility with potential lenders and investors. Their recommendation that companies increase the transparency and openness of information gets to the heart of why financial intermediation is broken in China. Other recommendations for offering new financial products tailored for food companies, improving loan guarantees, and finding new ways to aggregate capital will go nowhere as long as companies routinely lie about their financial status and keep multiple sets of books. The absence of trust between investors and managers may be a reason why most Chinese companies are family-run, dominated by a big boss and his cronies, and fail to grow into large organizations.

Nuanced Role of State Ownership

Many outsiders think all Chinese companies are tools of the state and are flush with cash from subsidies and bank loans, but the reality is more nuanced. State ownership is more important in "heavy industry" sectors like steel, automotive manufacturing, and rail transport that were considered the commanding heights of the economy during the planned economy era. The food industry had no state-owned behemoths during the centrally-planned economy period, so private companies have a big role in the food industry (but there are a number of companies that descended from municipal or provincial food supply systems in the era of central planning).

According to the report, only 81 of Heilongjiang’s 1,147 “above-scale” food companies are state-owned or collective companies. None of the 7,000 “below-scale” enterprises are state-owned. However, the survey of “nonpublic” companies includes a number that are at least partially state-owned: a COFCO-owned ethanol plant (the biggest company surveyed with 2 billion yuan in assets); Beidahuang, a company front for Heilongjiang’s state farm system; Jiusan, the most prominent state-owned soybean processor; and a meat company that originated as a state-run slaughterhouse.

The report suggests that the Chinese government's policy support for the food industry is insufficient. However, the report lists a number of programs that benefit food companies, including the 20-year-old "green food" industry, and notes the creation of industrial parks and industry clusters has propelled the industry's growth. The ethanol industry--which accounted for the largest food company in Heilongjiang--has been heavily dependent on subsidies since it was started 10 years ago. The Heilongjiang report recommends including the food industry in the province's five-year plan and giving companies favorable land, tax, and loan policies. Support should be tilted toward "backbone" companies with priority for "green food," said the report's authors.

No R&D

Few of the Heilongjiang food companies have any significant research and development capacity and most have none. Only 14.5% of companies surveyed had "research organizations," and 29% reported a "shortage of technical personnel." The report recommends that companies should have closer relations to universities and research institutes, and they should share resources by setting up industry R&D centers.

Again, more fundamental problems hinder R&D. First, there are few experienced technical personnel to start with in an industry in its infancy that tends not to attract the brightest bulbs in the pack. One company bought advanced equipment for testing vegetables but left it sitting idle because no one knew how to operate it. Companies have no funds to support R&D and bosses looking for immediate riches are not interested in investments in R&D that will pay off years in the future, if at all. Even if a company does discover an innovation it will immediately be copied or stolen, preventing the company from reaping returns on its R&D investment.

Instant Industry Champions?

The province has also attracted foreign companies like Nestle and Coca cola, and China's government and industry officials view these multinationals with trepidation. Many of these multinationals emerged from a similar sifting and shake-out process when North America and Europe urbanized during the 19th and 20th centuries. Chinese officials want domestic companies that can compete with these companies in the 21st century, but they don’t want to wait decades for their own companies to evolve and grow through an organic process. They see big, strong multinationals and presume that being big is what makes them competitive when it's actually their competitiveness that makes them big.

With a Chinese food industry spinning its wheels in a low-tech, copy-cat rut of vicious competition, systemic problems prevent industry champions from emerging. The temptation of government officials is to play Frankenstein by trying to create big industry champions by throwing money at them to give them the hardware accoutrements of big, successful companies. However, the lack of effective internal management that made multinationals what they are today will result in wasted resources, disappointment, and seething rancor.

Thursday, January 2, 2014

China's Ministry of Land Resources has announced that their latest land survey (which is actually four years old) discovered that the country has 11-percent more cropland than they have been reporting since 2008. They were really lucky to find this land, because agricultural officials are about to declare large swathes of cropland off-limits to production due to pollution with toxic heavy metals or vulnerability to erosion. And, by golly, when this poor-quality land is removed from the new total, China will still be above the minimum amount of land needed to maintain "food security." How about that?

The "new" land survey reports that China had 135.4 million hectares of cultivated land as of December 31, 2009. That exceeds the total reported for 2008 by 13.7 million hectares, or 11 percent. (The 2008 data were described as results of a Ministry of Land Resources survey.) It's also bigger than the total of 130 million hectares found in the country's 1996 agricultural census.

Actually, the survey found more of every kind of land. Somehow, in one year China added 17.9 million hectares of forests, 25.5 million hectares of grassland, 3 million hectares of orchards and tea plantations, while also devoting 1.8 million hectares to mining, industrial and residential uses and 5.4 million hectares for roads and rails. Not only is China an "economic miracle," the country also apparently has figured out how to create more land! What an amazing country (not!)

China's
land area statistics, then and now

2008

2009(2nd land survey)

change

---------million hectares-------

Total of uses below

689.9

770.8

80.9

cultivated cropland

121.7

135.4

13.7

orchards

11.8

14.8

3.0

forests

236.1

254.0

17.9

grassland/pasture

261.8*

287.3

25.5

other land for agricultural use

25.4

na**

-25.4

residential, industrial, mining use

26.9

28.7

1.8

transport infrastructure

2.5

7.9

5.4

water--reservoirs and irrigation

3.6

42.7***

39.0

Source: 2008 data published in China Statistical Yearbook; 2009 data from Ministry of Land Resources "2nd land survey".*Yearbooks from 2008 to 2012 reported exactly 400 million hectares of grassland.**No "other agricultural" land was reported by the 2009 survey. *** "water" for 2009 may include fish ponds that were included in "other agricultural" in 2008.

A press conference was held to explain why the cultivated land total increased. The Minister of Land Resources explained that the second survey used new standards, was more complete, and used better methods. Moreover, farmers used to underreport land when it was subject to tax, but now they report their previously hidden land so they can get subsidies or rent it out.

A careful comparison of these figures with data on land area published in the past suggests statistical subterfuge. First, the Ministry appears to have kept the 2nd land survey results secret for over three years. Why did it take the Ministry of Land Resources four years to report data for December 2009? The Ministry's 2009 "Land Resources Communique" (published April 2010) reported that the second land survey was progressing well and that all rural units had reported their data--surely the survey was finished in 2010 sometime. The 2008 land survey results had been published the year following the survey.

Officials were quick to emphasize that China cannot loosen its protection of agricultural land despite the 13.7 million hectares discovered by the survey. China still has a per capita cropland endowment half the world average.

The Minister of Land Resources also emphasized the poor quality of much of the land. He said 5.6 million hectares is in regions vulnerable to floods, 4.3 million hectares are on slopes of 25 degrees or more, and the Ministry of Environmental Protection has found that 3.3 million hectares of land has medium-to-high levels of heavy metal pollution. Some has been damaged by mining and subsidence. These problematic lands add up to 12.2 million hectares, slightly less than the 13 million hectares "discovered" by the survey. So, really, said the Minister, we still have just slightly more than the minimum "red line" cropland area. Pheww, what a relief!

The release of the survey results appears to be setting up a new policy that will take land out of agricultural production in 2014. By adding to the land total now, taking land out of production will be less alarming. The Minister gave a pronouncement that polluted land should not be used for growing crops, and he said the government will spend billions of yuan annually to rehabilitate polluted farmland and groundwater. The Minister raised concerns about serious degradation of grasslands, salinization, and desertification, and he said there is room to retire more erodible cropland using the "grain for green" program. It has been rumored that such ecological programs will be a feature of the 2014 "no. 1 document." In December, after the 10th-straight increase in grain production has been announced, agricultural officials began to warn listeners not to expect such increases to continue in the future. Authorities are probably releasing this larger number now so that the total will still be above 120 million hectares when land is retired by these new programs.

Reviewing the history of cropland statistics prompts more suspicions that cropland data are manipulated. In the 1990s China reported a total of about 95 million hectares of cropland. That total was widely believed to be understated, but it was consistent with historical statistics since 1949 (see chart below). The 130 million hectares reported after the 1996 census was far larger than any cropland total previously reported since 1949 (it took several years to report this number, reportedly because there was much argument over what the number should be). In the 2006 agricultural census, the total was cut to 121.7 million hectares and the 2008 land survey found a suspiciously identical number. Both numbers were slightly above the minimum "red line". Every statistical yearbook from 2008 to 2013 reported the 2008 land number.

"New total" is from "2nd land survey". Other data from Statistical Yearbooks.

Does a larger cropland area mean crop production is actually larger than statistics indicate? Or does it mean that yields are overstated?

The chart above shows a related statistic, the area sown to crops. This can exceed the cropland area if some land is planted with more than one crop in a year. However, one would expect the area sown and cropland area statistics to move up and down in sync, more or less. The chart above shows that area cultivated and area sown have not been consistent. Statistics on area sown were never revised after the 1996 revision of cultivated area statistics. (Lore has it that the statisticians had already factored in their estimate of how much cropland area was understated when they estimated area sown.) At the press conference, the vice director of the statistics bureau glossed over this question, saying the cultivated land and area sown to crops are from different surveys. Statistics on area sown to crops have been rising over the past decade while cultivated area fell--until the new revision.

One of the communist party's rent-an-experts from the Academy of Social Sciences insisted that the cropland revision has no bearing on grain production estimates. NBS's description of its methods suggest that the change in sown area is based on village surveys. But how does NBS estimate the national total? If NBS does not base total sown area on cultivated area, how does NBS estimate total area sown to crops? The pieces of the puzzle suggest that total sown area (and by extension, crop production) is a number fabricated by the statisticians.